Global Payroll 101: Understand These Key Terms
Insights also provided by Mary Christie and Maggie Novo-Chavarry, of ADP's Business Transformation Practice.*
Are you a payroll professional working for an organization that has recently expanded operations to international markets through organic growth and/or acquisition? Or are you a purchasing, procurement, finance, or IT professional, familiar at a high level with global payroll operations but not versed in-depth in the lexicon? If so, welcome to this fascinating world!
While there are many complex operational considerations for paying employees internationally, the purpose of this article is to help those newer to global payroll (whether they are in the payroll function or otherwise) understand some of the most common key terms used by seasoned global payroll professionals and providers alike. We have explained these key terms alphabetically below for ease of reference.
Key terminology in global payroll
Here are some of the most common terms, phrases, acronyms, and/or concepts that are helpful to understand in the realm of global payroll.
Best of breed (BOB)
The terminology "best of breed" is used to refer to software solutions that are leaders in the marketplace for their particular niche, like a software solution that is well known in the marketplace for high performance in learning management. In the context of global payroll, however, "best of breed" or BOBs primarily refer to local, country-specific payroll solutions selected to cater to the needs of the employee population in that specific country. The focus for these solutions is not necessarily on integration or data visibility across the enterprise; rather, it is on meeting the country- or employee population-specific rules, regulations, and requirements. Often, an organization may select BOB solutions as part of a decentralized payroll service delivery approach.
Employer of record (EOR)
An Employer of record (EOR) is a service offered by organizations that (for a fee) serve as the legal employer operating in a country on your organization's behalf, handling tasks such as hiring, terminations, and payroll in that country. This is also called a Global Employment Organization (GEO) when hiring outside the global headquarters country. The advantage of leveraging an EOR for international payroll is that an organization doesn't have to establish a subsidiary or legal entity in the country; rather, the EOR serves as the de facto local employer from a legal and financial standpoint. Oftentimes, organizations may consider an EOR approach for global expansion where they have a handful of countries with one or a few employees and want to outsource the legal and financial tasks to another company that has expertise (including compliance and regulatory expertise) in such matters for international locations.
ExPat / InPat
Whether a worker is an expatriate ("ExPat") or an Inpatriate ("InPat") depends on the point of reference of the HR or payroll person working with them. Both terms refer to a person residing and working in a country other than their home country. For example, if a United States citizen is on assignment and working in France, they would be an expat on the U.S. payroll (the "home" payroll). That same U.S. citizen on assignment and working in France would have an impact on the payroll for France (the "host" payroll). Expat payroll is also referred to as "shadow payroll" and is used to record benefits and report and pay taxes to the home country, but not to pay the employee.
Global payroll
In contrast to selecting individual BOBs for payroll in each specific country, a global payroll approach and strategy seeks to standardize and optimize payroll providers on one (or few) payroll providers (such as ADP) that have global capabilities. The focus in choosing a payroll provider is on provider optimization and standardization, automation, data visibility, reporting and analytics, and payroll governance for the enterprise.
Global business services
Shared Services Centers (SSC) typically centralize and deliver a menu of transactional services to internal clients in a "business within a business" model. They typically leverage Service Level Agreements (SLAs), with defined and agreed-upon Key Performance Indicators (KPIs). They are also often characterized by internal charge-back mechanisms whereby the SSC "charges" the business for its services. Shared services are generally leveraged by at least mid-sized to large, decentralized, or distributed organizations. Global Business Services (GBS) take shared services one step further and are used by multinational organizations. GBS features multi-function SSCs (e.g., finance, HR, IT, etc.) that serve the enterprise.
Global system of record
An HR System of Record (SOR) refers to the primary database where employee data resides. Ideally, the HR SOR automatically integrates so that data "flows" with minimal manual intervention into other important systems, such as the payroll system and the Time & Attendance (T&A) system. The SOR is considered the "single source of the truth" for employee data. A Global System of Record (GSOR), then, extends this concept to mean one unified HR system for the enterprise around the world.
"Long tail"
In the context of global payroll, "long tail" refers to a situation where an organization has numerous countries where it operates and pays employees, but the number of employees paid in each location is few (e.g., five or fewer). If you were to chart the number of employees by country, it would look like a long tail. This situation results in a lot of administration by the payroll team(s) to not only pay employees correctly but also keep up-to-date with various SLAs of the different payroll providers and with all the varied legal and compliance regulations in each country. Long-tail payroll and its associated complexities are often one of the drivers for organizations to optimize and standardize their payroll providers globally and to strategically outsource payroll activities to those providers with experience running payroll in the international locations where the organization has a presence.
Conclusion
The world of global payroll is full of excitement but also has its challenges. An understanding of key concepts and terminology is foundational for payroll professionals who are new to the realm of global payroll and for those who are in other functions, such as procurement, IT, and finance, who contribute to the organization's move toward a global payroll strategy.
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*The mission of ADP's Business Transformation Practice is to help enterprise clients understand leading practices for global payroll, develop a global payroll strategy, and engage in a global payroll and time and attendance (T&A) transformation with ADP. Clients should contact their ADP sales partner for more information about engaging our services at no cost.
